Currency Market Digest: 25th February 2025

What happened last week?

UK inflation rose to 3% in January, exceeding forecasts and posing challenges for the Bank of England’s rate-cut plans. Higher airfares, private school fees, and food prices contributed to the increase. Core inflation climbed to 3.7%, while services inflation hit 5%. The BoE expects inflation to peak at 3.7% mid-year before easing. Wage growth remains strong, but economic growth is weak. Chancellor Rachel Reeves faces criticism over rising inflation and tax policies, with public confidence declining. Analysts predict the BoE will cut interest rates gradually, balancing inflation risks against economic stagnation and financial pressures on households.

The UK’s January budget surplus fell short at £15.4bn, missing forecasts due to weak tax receipts. Borrowing hit £118.2bn, exceeding projections. Economic struggles, weak business confidence, and job cuts challenge Chancellor Reeves. With fiscal headroom shrinking and defense spending pressures rising, tough choices on taxes or spending cuts loom before March’s statement.

German conservative leader Friedrich Merz, set to become chancellor after the CDU/CSU’s election victory, is now seeking a coalition with the SPD despite harshly criticizing them during the campaign. Talks, led by Merz and SPD co-leader Lars Klingbeil, aim to conclude by Easter. Both parties agree on the need for swift action amid economic stagnation, migration challenges, and rising defense demands. Key disputes include tax cuts, social spending, migration policy, and constitutional limits on public borrowing. A potential compromise may involve constitutional reforms before the new parliament convenes on March 25. Ministry allocations are also under negotiation, with CDU eyeing finance and defense, while SPD may claim interior and foreign affairs. While the coalition lacks a historic majority, both parties recognize the urgency of preventing further voter shifts to the far right. Merz warned failure to govern effectively could reshape Germany’s political landscape by 2029

Federal Reserve officials signaled they need "further progress on inflation" before cutting interest rates, according to minutes from January's FOMC meeting. Citing economic uncertainty, they maintained a "restrictive" stance, wary of inflation risks and Trump's policies. While no preset path exists, rates could stay high if inflation persists or ease if growth weakens. Following a 2024 rate cut, the Fed held rates steady at 4.25%-4.5%. Markets reacted mildly, with bond yields dipping and stocks inching higher.

Federal Reserve governor Christopher Waller downplayed Trump's tariffs as a minor, temporary inflation driver, signaling they shouldn’t influence rate decisions. Despite strong growth and price pressures, the Fed remains cautious on cuts. Some officials worry tariffs may have lasting effects, but Waller expects inflation to ease later in 2025.

A US resolution calling for a "swift end" to the war in Ukraine passed the UN Security Council with Moscow and Beijing's support, despite abstentions from France and the UK. The vote highlighted a shift in US-Europe relations under Trump, who has pursued a transactional foreign policy, weakening Western unity.

South Africa’s budget was postponed for the first time due to coalition tensions over a proposed VAT hike to 17%. Finance Minister Enoch Godongwana delayed the speech after cabinet disagreements, with opposition from both ANC and DA members. The delay highlights ongoing clashes between coalition partners over economic policies. DA leader John Steenhuisen warned the VAT hike would hurt the economy, while opposition parties condemned the postponement. The Rand weakened, and markets fell. Godongwana stressed the need for alternative funding solutions, as raising corporate taxes was not viable. The revised budget will be presented on March 12.

India's growing energy demand makes it a key beneficiary of a pledge by Donald Trump and Narendra Modi to increase US oil and gas exports. As one of the world’s fastest-growing economies, India aims to boost its natural gas consumption, with plans to raise the share of gas in its energy mix from 6% to 15% by 2030. Currently, Russia and Qatar are leading suppliers, but the US, the world's largest LNG exporter, accounted for 20% of India’s LNG in 2024. India's increasing energy needs, along with its efforts to reduce trade surpluses, create significant opportunities for US suppliers to expand their market share.

What to watch out for this week?

All times are GMT

• All day -JPN National Holiday Emperors Birthday
• 05:00 - SGD CPI (YoY) (Jan)
• 10:00 - EUR Eurozone CPI (YoY) (Jan)

• 07:00 - EUR German GDP (QoQ) (Q4 2024)
• 15:00 - USD Consumer Confidence

• All day - INR National Holiday Mahashivratri
• 05:00 - JPY BoJ Core CPI (YoY)
• 15:00 - USD Crude Oil Inventories
• 15:00 - USD New Home Sales (Jan)

• 08:00 - GDP (YoY & QoQ) (Q4 2024)
• 13:30 - USD Durable Good Orders (MoM) (Jan)
• 13:30 - USD GDP (QoQ) (Q4 2024)
• 17:00 - USD Initial Jobless Claims

• 13:00 - EUR German CPI (MoM) (Feb)
• 13:30 - USD Core PCE Price Index (YoY & MoM) (Jan)
• 13:30 - CAD GDP (YoY & QoQ) (Q4 2024)